should do well. The stock market, for example, got a boost in the aftermath of the election, but then went into a decline. “If investors
see their stock portfolio bouncing around,”
Gordon says, income-producing assets in real
estate will start to look even better.

So far, the big surprise of the Trump erahas been how little change has occurred. “Alot of us thought that Trump’s proposalswould have more legislative traction,”Gordon says. “But it’s just been chaos.”The proposed repeal of the AffordableCare Act is a good example. It may havefinally passed the House, but its future inthe Senate remains uncertain. “The odds ofthat getting passed are very low,” Gordonsays, but he still urges investors to watch its progress very care-fully. In the past 10 years or so, as health care providers havereconstructed their delivery systems, institutional investors havegotten far more involved in the sector. Therefore, althoughrepeal is a low probability event, it also has the potential to havea major impact.—Brian J. Rogal

CAPITAL SPOTLIGHTBanks Face More Exposure to CRE Risk

US bank lending into commercial real estate has now surpassed its
pre-recession peak, a generally positive development. However,
S&P Global Ratings warns that it’s not all good news.

“Exposure to CRE remains an important factor in our ratings onbanks, and we believe the risk related to CRE has increased, whichcould have negative ratings implications over time,” says creditanalyst Rian Pressman. S&P says that although its assessment ofeach bank’s underwriting practices plays a critical role in its assess-ment of its CRE lending concentrations, lenders with higher con-centrations may be at risk of downgrades “if the asset quality perfor-mance of the sector substantially worsens because of higherinterest rates or deteriorating economic conditions.”The ratings agency identifies a number of pressure points forbank CRE portfolios that could be triggered by factors rangingfrom a spike in interest rates to exposure to markets or subsectorsthat pose risk. For example, markets directly exposed to energysector raise a caution flag as far as S&P analysts are concerned. InHouston, for instance, valuations in the office sector remain at risk“given the amount of space occupied by upstream and servicescompanies within the oil and gas industry,” according to S&P.

Another emerging risk to bank asset quality is “CRE tied to
overheated multifamily markets.” Citing the findings of the
Office of the Comptroller of the Currency, S&P expects construction to outpace demand, especially at the higher end of the
market, with concomitant increases in vacancies and declines in
rent growth.

Although vacancy rates in general have been improving in sectors other than multifamily, S&P identifies certain CRE subsectors
as troubled because of secular changes in the marketplace.
“Retailers have come under pressure from evolving consumer preferences for purchasing goods online,” for example.

Similarly, S&P says, a secular change in the way people work
has put a crimp on demand for suburban office buildings.

Corporations have been relocating from the suburbs to city cen-ters to attract millennial-age employees.“Such moves also generally encompass areduction in overall square footage, reflect-ing the proliferation of telecommutingarrangements,” according to S&P.

Last and certainly not least, S&P sees
hotels as “particularly susceptible to cyclical economic weakness.” Judging by an
analysis of default rates by property type
for loans with debt service coverage below
1.0x, loans secured by hotels have a higher
propensity to fall below 1.0x compared to
other property types, “despite being originated at a higher going-in debt service
coverage.”—Paul Bubny

SECTOR WATCHRetail and Distribution May Converge

It could give the phrase “mixed use” new meaning. Fitch Ratings
sees a convergence of industrial distribution and retail real estate
in the future, driven by the growth of e-commerce and the
increasing emphasis on delivery speed as well as pick-up services
for retail goods.

“Retail real estate sites and e-commerce last-mile distributionsites now essentially serve the same purpose—the distribution (orstaging) of goods for sale to the end user,” the ratings agencyrecently said. “One has a delivery focus but without public access,the other has public access but without a delivery function. Retailcenters that exhibit the best demographics, which include percapita income and population density, will be most easily reposi-tioned and most capable of managing the secular shift in howgoods are sold and purchased in the 21st century.”The two worlds already are converging in a number of ways,such as online retailers opening brick-and-mortar stores. Yet Fitchsees the lines between the two becoming even more blurred.“Ongoing changes for retail real estate and industrial/distribu-tion space have put the future role of shopping centers and lower-quality malls in question.

“E-commerce continues to take share from bricks and mortarretail, resulting in tenant and retail property softness,” the firmreports. “We believe well-located retail properties and REITs withportfolios centered on consumer demographics will see contin-ued demand as delivery and pickup services.”The ratings agency sees owners of infill retail locations that canalso function as delivery and pickup locations—i.e. retail distribu-tion facilities—as the likely winners as this convergence accelerates.“The need to distinguish between an attractive retail or last-miledistribution site—zoning notwithstanding—will become less mean-ingful as the function of the real estate is the same: providing a wayto distribute goods to customers. The old real estate axiom, ‘loca-tion, location, location’ applies, possibly now more than ever.”

The maxim’s application may be taking on a different shade
of meaning when distribution enters into the picture for retail
sites. While values for community shopping centers and regional
malls traditionally have been measured by their proximity to
population density and the per capita income of their selling
areas, “last-mile distribution and pickup purposes will also be
considered in drawing consumer foot traffic and buying power,”
according to Fitch.—Paul Bubny

ExecMoves

Jackson Hsieh has been
named CEO of Spirit Realty
Capital. Formerly the vice
chairman of investment
banking at Morgan Stanley,
he joined the net lease
REIT this past September.